Thursday, 19 September 2013

The power of Free

I'm currently reading the book The Irrational Consumer for review here in this very blog (I expect the review to appear in a few days). The rather attractive idea is that this is a business book that makes use of our irrational approach to economics to improve customer relations. (The author specifically declines the alternative approach, which is to make use of our irrational approach to economics to rip 
off our customers. What a nice chap.)

Something I'd come across before, but still has such a dramatic impact that it is worth repeating here is the power of free. Don't worry if you aren't in the business of selling things to people - it is still fascinating, if only as a way to think about your own rationality, or lack of it, when faced with economic decisions.

The example given is an experiment undertaken by Ariely in 2008 where a series of participants were offered a choice between a quality praline at 15 cents and a mass produced chocolate at 1 cent. I personally think this is a slightly risky experiment because chocolate is such a personal taste. I, for instance would rather have a piece of cheap Cadbury chocolate than anything the Lindt 'chocolatiers' can whip up in their workshops. However, let's ignore that foible.

When the experiment was done 73 percent went for the fancy chocolate and just 27 percent went for the cheap and cheerful option. But then the experiment was repeated, with the praline at 14 cents and the mass produced chocolate free. Now just 31 percent went for the praline and 69 percent for the less sophisticated product. Yet the price differential between the two was exactly the same. The majority were prepared to pay 14 cents more for the quality product as long as the cheap one cost just 1 cent, but make the cheapo option free and there was a scramble to lay their hands on it.

The fact is, people are suckers for 'free' and we should never forget this. However it is an approach that has to be tempered with some concerns. If you offer something for free, then start to make a large charge for it, people are less inclined to take it up than if the new charge is relatively small, or if the same large charge follows a fairly sizeable introductory price. We easily get into the mindset of something being free and then resist paying the more sizeable prices. This is probably an argument for not making books free, but rather selling them at a low price (e.g. 99p) for a brief introductory period, even though you miss out on the attraction of free.

Perhaps the best thing, if possible, is to keep the basic item free but have a premium version (the so called freemium model), so you don't get that unfortunate comparison of 'this was free for the first year but now I'm paying through the nose'.

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